Carbon Pricing and Cross-Border Electricity Trading for Climate Change Mitigation in South Asia

South Asia's electricity supply system is quite carbon-intensive, particularly due to extensive use of coal. Under "business as usual," that situation is expected to continue for several decades. Using an electricity system planning model, this study investigates two complementary strategies to reduce CO2 emission intensity of the power sector in South Asia: carbon pricing, and expansion of cross-border electricity trade to exploit clean energy resources, especially hydropower. The study finds that with a carbon tax imposed on fossil fuels used for power generation, CO2 emissions from the power sector would be 10% lower than that in the baseline over 20152040 even if the cross-border electricity transmission capacity is not expanded from the current level. On the other hand, if the cross-border transmission capacity is expanded to facilitate unlimited power trading across countries, the carbon tax would cause 16% reduction of regional power sector CO2 emissions from the baseline. The regional electricity trade is not only beneficial economically as it saves almost US$100 billion electricity supply cost in the region over 20152040, but also an attractive option for climate change mitigation. The carbon tax would, however, increase the power supply cost and could adversely impact consumers unless the carbon tax revenue is used as a safeguard measure.